• Dated 23^rd April, 2025

Kerala High Court Strikes Down GST on Mutual Transactions Between Associations and Members, and held Section 7(1) (aa) of CGST Act Ultra Vires:

The High Court of Kerala at Ernakulam, in a recent landmark decision has declared the provisions laid down in Section 2(17)(e) and Section 7(1) (aa) of the CGST Act, 2017 as unconstitutional and void. These provisions attempted to bring transactions between associations and their members within the GST purview by treating them as two separate persons.

Whereas, the matter involves coercive action from the Directorate General of GST Intelligence for the recovery of tax on various services rendered by the Petitioner to its member-doctors, e.g., Social Security Schemes or SSS (I, II, and III), Professional Disability Support Scheme (PDSS), Professional Protection Scheme, Kerala Health Scheme, etc.

Consequently, in the impugned case, the Hon'ble High Court questioned the constitutional validity of the said provisions under Article 246A.

Petitioner's Contention:

The Petitioner challenged the retrospective amendments on the following grounds:

• Principle of mutuality: The principle of mutuality means a club and its members are not separate entities - they are part of the same collective. Since Goods and Service tax (hereinafter referred to as GST) applies only when one person supplies goods or services to another, transactions within a club are not considered "supplies."
• No service between club and members: The basic feature common in sales and services was that both required the existence of two parties. GST can only be levied where two distinct legal entities are involved in a transaction. In the case of clubs, services provided to members are seen as self-service because both parties are legally the same. Even the Supreme Court recognizes that no sale or service exists between a club and its own members.
• Legal position at the time of the constitutional amendment: The Constitution 101st Amendment defined goods and services tax as a "tax on supply of goods or services or both", as per Article 366(12A). Whereas, at the time of its enactment the plain meaning of "supply of goods or services" is supply by one person to another. Thus, the scope of the legislative power granted by the Constitution under Article 246A to levy GST is that such a tax can be levied only where there is supply of goods/ service by one person to another. Section 7(1) (aa) tried to override this by fictionally treating clubs and members as separate. This attempt contradicts constitutional limits under Article 246A and prior judgments like Calcutta Club.
• Retrospective law cannot be unreasonable/confiscatory: In the instant case, given, the ratio in Calcutta Club, there could have been no levy of GST on clubs and associations prior to the insertion of Section 7(1) (aa). The said insertions thus created a new levy. This is done by overturning a long-held position of law i.e., the mutuality of clubs and association. This sudden change created a new tax burden without proper constitutional backing,

Respondents' Contention:

Department, (hereinafter referred to as the Respondent) defended the amendments on the following grounds:

• Existence of Section 7(1)(a) and Section 2(17)(e): The Respondent contended that Section7(1)(a) and Section 2(17)(e) existed effective 01-Jul-17 and that by itself made supplies of goods/services by clubs/associations to its members taxable effective 01-Jul-17 irrespective of the newly introduced Section 7(1)(aa) notified on 01-Jan-22.
• Acts of other Assesses: The Respondent contended that many other clubs/associations in the country had taken registration and started paying GST even before the insertion of Section 7(1)(aa) without any doubt as to the liability to pay GST in accordance to Section 7(1)(a).
• Existence of separate Income tax Pan No.: The Respondent contended that the Petitioner and its members have all along been different persons since the Petitioner had obtained a separate income-tax PAN then its members.
• Constitutional validity of the amendment: The power for enacting the Central Goods and Services Tax Act (CGST) and Kerala Goods and Services Tax Act (KGST) is from Article 246A and Article 366(12A). Article 366(12A) provides that Goods and Services Tax means tax on any supply of goods or services or both, except taxes on supply of alcoholic liquor for human consumption. Thus, when no limitation or restriction is prescribed on how "supply" or "person" should be defined, the field is wide open for the Parliament and the Legislature to define these terms under GST.

The Hon'ble Court held:

• GST Requires Two Separate entities (Upholding the Doctrine of Mutuality): The Court held that GST can only apply when there are two separate parties. A club and its members are not separate under the principle of mutuality, as upheld in multiple earlier judgments including Calcutta Club. The Constitution does not allow the legislature to override this principle through a mere statutory amendment.
• Constitution Limits Legislative Expansion: The meaning of "supply" as used in the Constitution cannot be changed or expanded by an ordinary law. Article 246A allows taxation only on the 'supply of goods and services'—not on internal transactions or self-supplies. Section 7(1)(aa), by introducing artificial phrases like 'activities or transactions', goes beyond the constitutional scope and is therefore invalid.

Impact:

This judgment is a significant reaffirmation of the principle of mutuality in Indian tax jurisprudence. It also makes it clear that the legislature cannot use retrospective laws to treat transactions between associations and their members as taxable "supplies" unless the Constitution itself allows it.

Author: Tanima Ghosh

Edited by: Shaily Gupta